The government’s decision to allow Oil Marketing Companies (OMCs) to raise Kerosene prices by 25 paise every month till April 2017 will cut down their losses on subsidized sales of the cooking fuel by Rs 2,040 crore next financial year.ETEnergyWorld | July 13, 2016, 15:40 IST

New Delhi: The government’s decision to allow Oil Marketing Companies (OMCs) to raise Kerosene prices by 25 paise every month till April 2017 will cut down their losses on subsidized sales of the cooking fuel by Rs 2,040 crore next financial year.

“The step to gradually increase Kerosene prices every month is a major reform considering the politically sensitive nature of the product. The move will lead to overall reduction in gross under-recoveries on Kerosene by Rs 760 crore in 2016-17 and RS 2,40 crore in 2017-18,” said K Ravichandran, Senior Vice-President at research and ratings agency ICRA.

The subsidy on Kerosene is expected to be in the range of Rs 9,000-12,500 crore in the curent fiscal assuming crude oil price to be in the range of $40-50 per barrel. For the month of July 2016, subsidy on kerosene post the 25 paise hike is likely to stand at Rs 13.12 per litre. As per the existing under-recovery sharing formula, the centre bears kerosene subsidy upto Rs 12 per litre, while the balance is borne by upstream companies.

“The upstream companies would be major beneficiaries of the reform especially at current or higher level of crude oil prices,” Ravichandran said. At an Indian Basket crude oil price of $44-45 per barrel, the kerosene subsidy tends to be around Rs 12 per litre, implying no subsidy burden on upstream companies. At higher oil prices beyond $45 per barrel, the upstream companies would have had to bear the kerosene under recoveries.

Post the total planned hike of Rs 2.5 per litre in kerosene prices over the next 10 months, the public sector upstream companies may not have to bear under-recovery on account of Kerosene upto a crude oil price of $50-52 per barrel. “With monthly price revisions, the burden on PSU upstream companies is expected to be lower by Rs 700-760 crore in FY2017, which may be 2.5 per cent of the combined profits of ONGC and OIL in FY2016. Thus, at prevailing crude oil price ($46 per barrel) or higher, the upstream companies’ net realisation and cash accruals will improve modestly,” Ravichandran said.

The move to increase retail prices of subsidised kerosene along with implementation of the planned pilot scheme to provide Direct Benefit Transfer for Kerosene (DBTK) may also lead to lower diversion of kerosene for unintended purposes. The DBTK being rolled out on a pilot basis in 33 districts, is aimed at reducing the leakage of kerosene.